Policy reform of emission taxes and environmental research and development incentives in an international Cournot model with product differentiation.

Abstract

This paper studies multilateral and unilateral policy reforms of environmental R&D subsidies and emission taxes in a two-country Cournot model with oligopolistic interdependence. The analysis indicates, inter alia, that there is a potential family of multilateral and unilateral policy reforms which can be set by pollution-intensive and pollution-moderate countries to reduce global emissions. In particular, the analysis suggests that a unilateral increase in the subsidy in the pollution-moderate country may reduce global emissions. The multilateral policy reform of the subsidy and tax in the pollution-intensive country can also reduce global emissions and increase welfare under certain conditions. The role of product differentiation in the context of policy reform is also examined.